Bottoms are a Process
Stocks fell hard after Federal Reserve Chairman Jerome Powell said inflation was too high and more rate hiking was ahead. The initial market reaction to the ¾ point increase was positive, the close was not, as the S&P 500 index closed down over 2%. The Nasdaq continued to absorb most of the downside falling over 3.30%. All eleven sectors for the S&P 500 were in the red, with consumer discretionary and technology leading the way. The 10-year treasury yield inched up one basis point to 4.06% and as of this writing it is around 4.19%. Powell came out and crushed the stock market during his press conference when he said that the inflation fight was far from done. Then he followed that statement up with “We still have some ways to go and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.” The market was hoping the Fed Chairman was going to use more accommodative language. That obviously was not the case and markets responded accordingly.
So where do we go from here? We expect the markets to be more data dependent over the next couple of weeks to months. We also expect the Fed to increase the Feds funds rate ½% in December followed by another ¼% raise in February. The economic data points that we observe are showing signs that inflation has peaked and is beginning to decline.
As always bottoms are a process and sometimes it takes three months and other times nine months before markets reassert themselves and begin a new sustainable uptrend. Example is 2008, where the markets traded in an 8-month range before finally breaking out to the upside. While the market hit a low on March 9th, 2009, it traded in a range that often wears out investors emotionally and that is when the biggest mistakes happen. This is where investors become discouraged and give up. Emotions, especially regarding money, are extremely powerful and some of the most damaging financial decisions are made as the markets put in a bottom. Experienced investors refer to this as moving money from the weak hands to the strong hands.
Keep in mind time after time we have seen stocks bottom before earnings per share, jobs and gross domestic product numbers start to improve. The bottom line, stocks sniff out better times and rally in the face of bad news.
The views expressed are not necessarily the opinion of Cadaret Grant, and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investing is subject to risks including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.